Investing in commercial syndication using Solo 401K

14 Replies

Hi everyone, if I want to use funds in my self-directed Solo 401K to invest in a multi-family apartment commercial deal, are there any caveats I need to know about for asset protection? I'm just a passive investor, someone else is syndicating it. But I'm curious about questions like, should I worry that someone sues this apartment building investors and impacting the rest of my Solo 401K?

@Gabrielle T.

3 letters...LLC. Syndicating a deal through a partnership LLC should, in theory, insulate you from any potential litigation. I say "in theory" because this highly depends on the enitre legal structure of the partnership. Make sure you hire a good attorney to assist you.

As I understand it, by it's very definition a partnership that consists of limited partners (LP's) who bring the capital, and the general partners (GP's) who do the active management you as an LP are insulated from any legal action as you haven't been actively involved in any decisions that would result in a lawsuit.  Even if by some chance the LP's were exposed I would expect that any action is limited to the legal partnership as laid out in the operating agreement and shouldn't ever get as far back as you're Solo 401k or you personally.

As @Chase McArthur mentioned consult an attorney, maybe even a syndication attorney who can answer that question more specifically

My take on this is that you are moving Cap-Gain earnings to earned income rates, which does not make a lot of sense to me.  

Say you put $100K from an Traditional IRA or 401K. Over time they send the distributions to your account and at the end the big lump goes to your account. Say, in total, you doubled your money, now $200K.

Outside of the tax advantaged account, you would have paid taxes on the $100K (a less really) at the Cap-Gain rate (15% or 20%). 

If you mostly fail and have limited assets in retirement - you win, less taxes!  There are financial planners that can get you to $0 tax if you have little.

But assuming you are successful, when you start pulling the funds out (RMDs) they will be taxed at earned income rates.  Today those vary by income, but for the successful, likely 25% or higher.  Do you think they will remain this low? 

If you work through the math associated with Traditional IRA/401K, it only really works if you are at a lower tax rate. That was the pitch when they were created in the early 80's.

HINT: With current low tax rates, limit IRA/401Ks contributions and/or go for the Roth options. Consider conversions and withdrawals.

Sorry, just my opinion.

Regards,

Charles LeMaire

MF can be a GREAT investment.  All I am saying is to consider if you want to do it with qualified funds.  The same issue would apply if you bought Apple at $5 and sold at $505.  The profit is great, but you will likely hate the taxes (someday). 

Not a CPA, so take with a grain of salt!!!  The 1031, will delay taxes until the final sale (you still get the advantage of Cap-Gain) or until your demise (at which point inheritance tax kicks in, but the step-up in basis will happen).  Traditional IRAs and 401K return the money at earned income tax rates.

Charles

@Charles LeMaire that was very well articulated!  The advantages of using SDIRA and Solo 401k monies for investments may seem like a huge advantage but a lot of people who use them (myself included) probably don't think through the tax ramifications beyond the immediate investment under consideration.

@Gabrielle T.

@Chase McArthur

@Charles Soper

1. Agree with comments that liability should be limited by virtue of the nature of a syndicated investment but adding an LLC could add another layer of protection.

2. Please note that it's possible to invest via a Roth Solo 401k which would result in tax-free gains if you satisfy the qualified Roth distribution rules (typically 5 years and once at least 59.5 years of age).

Gabrielle,

Have you considered how you are structuring the investment? Taxes are always a consideration but you could have better asset protection on how you structure the deal. You could also lend yourself up to 50K, pay yourself interest on that loan and then lend on the project. Lather, Rinse, Repeat.

@Gabrielle T.

Definitely consult with an SEC attorney to get their professional opinion so that you will know what the GP needs to do in order to adequately protect the syndication.  

If the syndicator is doing their job property, they will form an LLC that is specific to that particular investment and will have their own holding LLC separately. The LLC will limit liability, but you will have to verify with a SEC attorney that being part of the LP will have even less liability.

@Chase Louderback Thanks. I'll check on that. They will form an LLC just for this deal on this MF complex.

@George Blower Thank you, I'll look into the Roth component within my Solo K.

@Nathan Paul Konyndyk I'm participating as a passive partner (forgot the exact right name, but essentially just providing capital, I'm not the syndicator), but I cannot participate through lending to them.

@Gabrielle T.

I think you already got the point, but I'll reiterate. If you are investing as a passive investor in a syndication, you're not liable for anything. Your only role is to provide capital (aka your investment funds) to purchase the property. Since most properties are "purchased" through LLC formation, you're a limited partner in such LLC which gives you a level of protection.

Feel free to reach out if you have more questions.

Originally posted by @Gabrielle T. :

Hi everyone, if I want to use funds in my self-directed Solo 401K to invest in a multi-family apartment commercial deal, are there any caveats I need to know about for asset protection? I'm just a passive investor, someone else is syndicating it. But I'm curious about questions like, should I worry that someone sues this apartment building investors and impacting the rest of my Solo 401K?

Investing with your IRA or 401k can be done. EquityTrust did a webinar not too long ago about this.

Check it out here